What's up Extreme Market Risk?

Dear Reader,
The Market.

• Debate against inflation states very few companies have pricing power.
• The coronavirus pandemic poses the most serious threat to maximum employment and potentially to price stability that the United States has faced in our lifetimes.
• A weaker currency tends to make China more competitive and makes life harder for U.S. exporters.
• The U.S. has an overdeveloped financial sector and an underdeveloped industrial sector, while China is the other way around.
• Another 2.12 million Americans filed for first time unemployment last week, bringing the 10-week total to more than 40 million people newly out of work.
• Small (retail) investors piling in late is not a good sign.
• There is no limit to how much money the Fed can print.
• Inspiration from Vinod Khosla, founder of Khosla Ventures
  • Whatever I believe, I should make happen
  • If you actually believe something, you try to make it happen
  • Failure does not matter, success matters
  • Anything worth doing is hard
  • If you want to make great products, don’t listen to your customers
  • With enough persistence, most things that seem impossible become possible

Just like hype and FOMO in luxurious retail and adventurous vacations (two examples), there is hype and FOMO in investing. It’s the newest factor to be used when evaluating market risk. The amount of retail investors joining the market has been “unprecedented”. Below is an example of the swarm.
 
One reason for this is consumers are using their stimulus checks and unemployment benefits to either save or invest. Below shows both scenarios.
 

These are due to consumer spending going down and personal “income” going up.
 
The issue of financial illiteracy looks like it’s being resolved (maybe) and finally the ownership of stock is not only in the top 10%’s hands, but there are many consequences and risks of this.

1. The federal deficit is worsening
2. Our national debt is looking very scary
3. Central banks around the world are increasing their balance sheets
4. Inflation in the long-term is looking more likely
5. Consumers are still defaulting on their debt (financial literacy is not there)

 
We have added to our list of risks. If any of these risks become extreme enough, we believe that we can see another correction in the market. We still hold the view that we are in a recession, and as history has shown, there is extreme volatility and movements in both directions. (Testing and retesting the highs and lows).

• A delay in the US reopening
• A new wave of viruses
  • We will be watching the Southern Hemisphere carefully
• Trade tensions/financial tensions with China
• Consumers and corporations defaulting on their debt
• Inflation

With all hype and FOMO, it gives a false reality and creates a façade. This is why most investors are still holding their short positions, and we share that bearish view as well.

QE. Quantitate Easing is a modern monetary tool used by the federal reserve as a backstop for the economy. It was first used in the United States during the 08 financial crisis by Ben Bernanke. QE is the process of purchasing government bonds and other financial assets in order to inject capital into the economy, for the purpose of stimulating the economy and encouraging consumption. QE is usually only implemented once fed rates reach near the 0% mark as a final effort. This process usually increases inflation and can help pull the economy out of a recession. More importantly, the real affects this has on our economy has to do with increasing liquidity, increase in risky asset prices, currency depreciation, and signaling. The most important of these is the signaling effect, or as some call it the fed put. This is a psychological impact which is derived from the thought that the fed will take extraordinary steps to keep the market and economy afloat. Most market movements occur directly after the announcement of QE, with the actual QE taking place weeks/months after the announcement. This delay is due to government inefficiencies (time it takes to announce vs the time it actually takes to act).
 
Keep Climbing,


The ACA Foundation